چکیده انگلیسی

This paper analyzes how openness and the distribution of factor ownership interact to determine individual and aggregate demand for pollution policy. Analysis of voter preferences in autarky shows that an increased stake in either the dirty or the clean industry can induce an individual voter to prefer stricter environmental policy. Similarly, the paper shows that poorer voters may be the greener voters within an electorate. The model also reveals that the incidence of pollution policy depends upon a country’s trade regime, with consequences for the direction in which income inequality influences aggregate demand for pollution policy.

مقدمه انگلیسی

Discussing the riots against the World Trade Organization in Seattle, 1999, The Economist summed up a common perception of how trade affects environmental policy: ‘…trade improves the environment, because it raises incomes, and the richer people are, the more willing they are to devote resources to cleaning up their living space’ (December 4, 1999, p. 17). This conclusion derives from a substantial body of empirical evidence concerning an ‘Environmental Kuznets Curve’. This evidence predicts that, after a turning point, higher levels of per capita income will correlate with lower levels of local ambient pollution.1 Combined with economic theories arguing that international trade raises the scale of economic activity and hence raises aggregate incomes, the conventional logic championed by The Economist seems to have some grounds.2 However, as is evident to economists versed in the Stolper–Samuelson theorem of international trade, trade can change the distribution of income within a country. Yet the question of how the distribution of income within a country alters its collective demand for environmental quality has been largely ignored.3 This paper explores these issues, highlighting the link between pollution policy and unequal ownership of the factors of production as well as the sensitivity of this link to a region’s trade regime.
This paper employs a simple analytic model in which individual agents have identical preferences over private goods and environmental quality but have heterogenous endowments of the capacities to produce clean and dirty goods. Pollution policy dictates the fraction of polluting capacity that is allocated to pollution abatement. Similar to Oates and Schwab (1988),4 policy is set via majority rule voting and voters are assumed to be aware of the general equilibrium consequences of policy and vote according to their own self interest. Analysis focuses on the manner in which individual self interest, and hence induced preferences for environmental policy, varies with the composition of individual endowments, and predictions are made as to how the stringency of elected environmental policy will vary with the distribution of endowments as well as with the economy’s trade regime.
This approach offers several new insights. Firstly, the model demonstrates that, in a closed economy, an increase in a voter’s share of an economy’s capacity to produce dirty or clean goods can make that voter prefer weaker environmental policy. In the case of a larger ownership share in the polluting industry, this possibility is unsurprising: pollution control reduces the profitability of polluting industries and this will be viewed with less favor by voters with bigger stakes in these industries. But this may also be the outcome when a voter gets a larger ownership share in the clean industry. When goods prices are determined in a closed economy, or ‘autarky’, pollution policy affects the rate of exchange between dirty and clean goods—it makes dirty goods more expensive. In essence, pollution policy alters the terms of trade between producers of clean and dirty goods. The larger is one’s stake in the clean industry, the more negative is the impact of this terms of trade effect, and so, again, the weaker the pollution policy that will be favored. Working in the opposite direction is a traditional income effect: as an individual gets richer (via increased ownership in an industry) she demands more normal goods, including more environmental quality. Which dominates, and so whether a greater ownership share in either sector induces a voter to stricter or prefer weaker environmental policy overall, is shown to depend on the elasticity of the marginal rate of substitution between private consumption and environmental quality and on the extent to which a voter’s portfolio of ownership shares is biased toward a particular industry.
As a related result, the paper also reveals that richer voters need not be the greener voters within an electorate. This possibility is in direct contrast to the previous literature and follows directly from the relationship between policy preference and endowment shares as discussed above. Essentially, environmental quality is a public good, while implicit contributions toward provision of environmental quality are proportional to individual endowments of polluting capacity. Accordingly, although richer voters may be willing to make larger implicit contributions toward provision of environmental quality, they may be unwilling to pay proportionately more, a property that is expressed as a preference for weaker environmental policy than that preferred by poorer voters within the same jurisdiction.
Secondly, the analysis reveals that openness to trade alters the incidence of local pollution policy, and this can fundamentally alter the relationship between income inequality and aggregate demand for environmental regulation. When relative prices are set on international markets, local owners of clean production capacity no longer suffer a deterioration in their purchasing power when local pollution policy is made more stringent. Consequently, a poor majority that derives its income from the clean industry and so may demand weak environmental policy in autarky (because of negative price effects) will instead demand strict environmental policy when the economy is open to trade (since consumers are now insulated from the price effects of local policy). Alternatively, a poor majority that earns its income from the dirty industry will want weaker environmental policy when the economy is open rather than closed because in autarky the polluting industry at least benefits from a higher relative price for dirty goods. These examples illustrate that the relationship between income inequality and demand for pollution policy depends critically on both the source of the inequality—concentrated ownership of clean as opposed to dirty factors of production—and on the extent to which relative prices are set outside local economies.
Thirdly, and finally, the paper uncovers a new basis for international trade. As a change in a region’s trade regime alters the incidence of its local environmental policy, individual preferences regarding the stringency of pollution policy will also change and sets of voters may swap perceptions of autarkic pollution policy as being too strict or too weak. This can have striking consequences. Even at world prices identical to those in autarky, the change in voter preferences that accompanies openness can induce a weakening (or tightening) of environmental policy. Any such change in policy alters relative supplies of net outputs, and so openness can generate trade in goods where no basis for that trade would seem to exist based on differentials between world and autarkic prices. In addition, the change in voter preferences induced by openness may dominate the usual substitution effect of trade, and so a country with a seeming comparative advantage in polluting goods—a country that would weaken its pollution policy upon the move to free trade if policy was set by a representative agent—might instead tighten pollution policy if policy is set by an electorate. This reinforces the importance of permitting heterogeneity across agents: models that employ a representative agent assumption may mispredict the direction of influence of openness on a country’s pollution policy. It also serves to illustrate that differences across countries in the nature and degree of income inequality, or in the process by which pollution policy is set, can form a basis for international trade in goods.
The structure of this paper is as follows. Section 2 introduces the model and establishes aggregate supplies and demands. Section 3 focuses on the link between a voter’s ownership of productive capacities and her preference over the stringency of environmental policy in autarky. Characteristics of a majority rule equilibrium are also analyzed. Section 4 analyzes how openness to trade changes the general equilibrium consequences of, and hence individual preferences regarding, the stringency of pollution policy. This section also highlights the interaction between openness and income inequality in the determination of aggregate demand for pollution policy. Section 5 concludes.

نتیجه گیری انگلیسی

This paper analyzes how openness and the distribution of factor ownership interact to determine individual and aggregate demand for pollution policy. It shows that, in autarky, a voter may prefer weaker environmental policy as her stake in either the dirty or clean industry increases. In the former case, a voter’s preference changes because she bears a larger share of the direct costs of pollution abatement: foregone output. But in the latter case an individual bears a larger share of the indirect costs of pollution regulation: high relative prices for dirty goods and so a worse rate of exchange for any clean goods an individual wants to trade with the rest of the economy. Acting in the opposite direction is an income effect. As a voter gets a larger share of the economy’s productive resources her income rises and so then will her demand for environmental quality. This paper shows that whether this income effect dominates depends on the elasticity of the marginal rate of substitution between private consumption and the environmental public good; if this elasticity is not sufficiently large then either one or both of the endowments or individual terms of trade effects will dominate and a greater ownership share in either industry can make a voter want stricter environmental policy. The paper also reveals an incentive for individuals with relatively small holdings of the economy’s income to prefer stricter environmental policies than do those who are richer. This possibility arises from the differences in the opportunity costs of pollution abatement across individuals according to their endowments of the polluting good, in contrast to the uniformity of the benefits from abatement. Whether poorer voters are the greener voters within an electorate is shown to depend again on the elasticity of the marginal rate of substitution between private goods and environmental quality—in particular on whether this elasticity is less than unity.
Regarding comparisons of preferences and policy in autarky and the small open economy, the paper shows that openness to trade at fixed world prices releases some voters from the general equilibrium consequences of pollution policy, and hence induces a change in the manner in which an individual ranks levels of stringency of a pollution standard. One consequence of this is the possibility that openness to trade with a higher world price for the polluting good (relative to autarky) leads to qualitatively opposite responses when policy is set by a representative agent as compared to by majority rule: a representative agent will loosen pollution policy, while it may instead be tightened under majority rule. This has important consequences for the validity of predictions regarding pollution policy that rely on assumptions of representative agents or social planners, particularly if we believe that pollution policy is set in a political arena. More generally, this analysis also suggests that variations across countries in their patterns of factor ownership, or even the mechanisms by which pollution policies are set, can serve as a basis for trade.
And finally, the paper offers predictions as to the manner in which income inequality affects electoral demand for stringency in local environmental policy. The paper shows that income inequality not only creates differences in this aggregate demand, but the direction of its influence depends on both the extent to which openness insulates the local economy from the price effects of its pollution policy, and on the underlying source of the income inequality itself.